Dollar firms as oil spike, bond rout revive inflation worries

The US dollar strengthened on Tuesday as a spike in oil prices, triggered by renewed hostilities between the United States and Iran, revived inflation concerns and sparked a global bond selloff.

Crude prices rose over 2% after President Donald Trump threatened further strikes against Iran, following the first exchange of direct attacks in a month. This pushed the 10-year Japanese government bond yield to 3% for the first time in three decades, while the yield on 10-year US Treasury notes reached its highest level since January 2025.

"A rout in global bond markets is intensifying and the dollar is climbing as an outbreak in hostilities between the U.S. and Iran revives inflation risks, raises the likelihood of interest rate hikes in the months ahead, and makes safe havens more appealing," said Karl Schamotta, chief market strategist at Corpay.

The market moves come after Federal Reserve Chairman Kevin Warsh adopted a more hawkish tone in his debut speech at the Jackson Hole symposium, stating the Fed would "have work to do" if inflation failed to cool. Fed funds futures traders now price in a 68% chance of a September rate hike, up from 35% before Warsh's comments.

Fed Governor Michael Barr said on Tuesday that if inflation does not cool quickly, it will be time for the central bank to increase interest rates. Treasury Secretary Scott Bessent, however, said bond yields reflect accelerating US growth and that inflation expectations are "flat to down."

The dollar index rose 0.16% to 99.57, with the euro down 0.15% at $1.1599 and sterling weakening 0.07% to $1.3538.

The Japanese yen fell 0.22% to 160.08 per dollar, as investors remained focused on the wide interest rate differential between the US and Japan. A rare joint intervention by the US and Japan in late July provided only short-lived relief for the fragile yen, which has since surrendered about half of those gains.